CBDC: digital forms of money issued by central banks

CBDC: What Is It and What Are the Types?

Central Bank Digital Currencies (CBDCs) are digital forms of money issued and guaranteed by a country’s central bank. There are two main types of CBDCs: retail and wholesale.

Differences Between Retail and Wholesale CBDCs

Retail CBDCs are intended for consumer use in everyday transactions, while wholesale CBDCs are used by financial institutions for settlements between them.

Status of CBDC Projects Implementation Worldwide

Currently, retail CBDC projects appear to be more advanced in terms of implementations and pilots than wholesale CBDC projects. Four emerging markets in the world, such as the Bahamas, Eastern Caribbean, Jamaica, and Nigeria, have introduced retail CBDCs.

Example: Retail CBDC in Nigeria

In Nigeria, where the eNaira was launched in October 2021, the adoption rate stands at around 6% with over 13 million wallets opened in a population of 223 million. The introduction of retail CBDC in this country is driven by a young demographic, large unbanked populations, widespread use of mobile phones, and the popularity of peer-to-peer (P2P) payments.

Future of Retail CBDCs

Most retail CBDCs focus mainly on P2P transactions and consumer-to-business (C2B) transactions, rather than on business-to-business payments. A study by the Bank for International Settlements (BIS) has shown that most central banks worldwide are conducting research or implementing CBDCs, with many considering introducing limits for retail CBDCs.

Digital Euros and the Future of Payments

The European Central Bank is currently exploring the introduction of digital euros, which will have a zero limit for businesses and governments. Businesses accepting payments in digital euros will automatically transfer these funds to their commercial bank accounts, potentially impacting the way the payment market operates in the future.

Banks and payment service providers must ensure appropriate solutions for businesses to accept payments in digital euros. As a result, businesses will be restricted in initiating payments using the digital euro system beyond refunds.

The introduction of retail CBDCs and digital euros has the potential to change the payments landscape worldwide, but it also presents many technological and regulatory challenges for banks and companies.